Learn how to succeed in this flat world--not just how to build better supply chains, but how to build competencies in network orchestration and change the shape of your thinking, strategies, and organizations to embrace this flatter world.

This chapter is from the book

In the 1970s, The Limited began working with Li & Fung to source its clothing. To tighten the cycle time of its supply chains, chairman and CEO Les Wexner set a time limit of 30 days for any order to be produced. This was absolute, whether the order was for 5,000 or 200,000 pieces; it had to be done in 30 days. This was one of the ways Wexner pioneered the concept of quick-response manufacturing. To meet the tight deadline, it became a normal practice for Li & Fung to sample many factories and to have these factories ready before The Limited decided on the size of the order. In this way, Li & Fung could reserve enough production capacity to respond quickly. If the order turned out to be a big one, Li & Fung would use several factories to manufacture the item in parallel. For the production to look as if it was all done in one factory, Li & Fung had to control the raw materials, trims, and patterns for all the factories used.

But when the garments arrived in The Limited's distribution center in Columbus, Ohio, each box contained a single size, color, and style of shirt or other product. Upon arrival, the boxes were first unpacked and the shirts were placed on a shelf by size. Then warehouse staff picked them from the shelves, attached the right price tags and labels, and repacked the shirts into new boxes to provide the right assortments for each store. This was a process that sometimes took as long as two weeks, at U.S. wages. Manufacturers on the other side of the world were racing to get the products made in 30 days, but then the shirts spent as much time on the water and half as much time again waiting in the distribution center before they reached the stores and consumers.

The Limited and Li & Fung then worked out pioneering arrangements that changed the distribution chain. First, they frequently used airfreight. Second, and perhaps more important, instead of picking and packing the products for individual stores at the distribution center, they arranged for assortments to be created at the factory in Asia. As the shirts of different sizes and colors came off the line, they were packed into typical assortments and bar-coded (later the boxes used Radio Frequency Identification tags). The Limited also sent over its U.S. retail price tags, and factory workers put them on the garments before they left for the retailer's U.S. distribution center.

This meant that instead of taking two weeks to be picked and tagged in the distribution center, the boxes could go in one door and out another to smaller trucks headed to the stores. Cross-docking was born. The boxes from the factories arrived in stores, and the goods were put directly onto the racks. Shaving a few weeks off the process had huge implications in the time-sensitive fashion industry. Because of the bar-coding, the system even allowed for adjusting quantities on the fly. If there happened to be a particularly cold season in New England and a particularly hot one in Texas, more of the short-sleeve shirts could go south and fewer north. The cost of creating assortments and putting on price tags at the factory was much cheaper in Asia than in the U.S. distribution center because of both lower wages and a more streamlined process.

When Li & Fung originally proposed the idea of the factory putting on price tags, buyers at The Limited were concerned. How could a supplier be told the retail price (which was significantly higher than the manufacturing cost)? Wouldn't this lead to tougher bargaining and more demands from suppliers? This proved to be an unfounded concern. The competitive process of bidding among vendors ensured that prices remained low. Besides, suppliers already had a pretty good idea of what retailers were charging, and this information was easy to find anyway.

The concern about giving away information on price tags reflects the old adversarial view of the supply chain. Every part of the supply chain was wrestling with the other members. Supply chain members were engaged in a great struggle to see who could extract greater value from the chain. The buyer squeezed suppliers on prices. The suppliers shaved costs to boost their own margins. It was a fight for a limited pie.

The genius of Wexner of The Limited was his ability to see the bigger picture. Giving Li & Fung the price tags created an opportunity to make the entire chain more efficient for everyone. Wexner realized he was not competing against his suppliers. He was competing against other retailers with their own networks. To optimize the chain required a level of trust that was not part of the old thinking about supply chains. The old mindset was that each stage was separate and adversarial. This resulted in packing shirts in boxes and then unpacking them in Ohio. The new mindset allowed all the players in the chain to work together to optimize the entire chain.

Wexner realized he was not competing against his suppliers. He was competing against other retailers with their own networks.

"Network orchestration" takes a broader view of the entire supply chain. The network orchestrator designs the overall supply chain, drawing together multiple factories in different regions to collaborate on a single product. Without orchestration, many of the gains of networks and global collaboration are lost because the resulting supply chains are suboptimized. What the discipline of management was to the old vertically integrated, hierarchical firm, network orchestration is to the company working in the flat world. It is an essential capability for this world, from orchestrating virtual networks such as Wikipedia and open-source software to delivering hard goods through global manufacturing.

The Challenge of Globalization 3.0

Thomas Friedman identified three primary periods of globalization. Globalization 1.0 might be seen as the rounding of the old flat world, from the time of Christopher Columbus's journey to the New World until around 1800. This was the emergence of a global market, with countries using advances in transportation and other technologies to connect with different parts of the world. The second period, Globalization 2.0, was the age of the rise of the multinational company, extending from 1800 to 2000. Falling transportation and communications costs drew the world more closely together and facilitated the development of a global economy. This age was driven by hardware revolutions, from railroads and steamships to telegraphs and telephones.

Today we have arrived at the third era of globalization, Globalization 3.0, the emergence of the flat world. Friedman describes this as the shrinking of the planet from "a size small to a size tiny." The most visible drivers of this phase are the rise of the personal computer and the development of the Internet, connecting individuals anywhere with each other (through e-mail) and information (through the World Wide Web) along high-speed fiber-optic cables. Friedman identified a third, less visible, driver of the flattening world, workflow software. These software programs allow individuals to collaborate on projects anywhere in the world, regardless of their location. This, in fact, allows dispersed individuals to work together to create a product or service—developing a cartoon program for television, delivering customer service, or producing 100,000 shirts for a retailer in New York in China or Guatemala (or both).

Friedman identifies other flatteners as well. The rise of outsourcing allowed companies to move their business processes to partners overseas, while offshoring resulted in a similar migration of manufacturing. The phenomenon of uploading allowed communities to contribute online to a collective product such as Wikipedia or open-source software. With supply-chaining, companies such as Wal-Mart began working with suppliers to improve their overall supply chains, cutting costs, streamlining logistics, and forging better links between suppliers and their own information systems. The next flattener, insourcing, saw the emergence of integrated logistics, as companies such as UPS took over more company functions than just delivery, from fixing laptops for Toshiba to delivering pizza dough for Papa John's. Similarly, the flattener "in-forming" put knowledge at the fingertips of everyone with access to Google—in other words, everyone. All of these forces have been accelerated by the "steroids" of wireless, digital, and personal technologies. These ten forces have leveled the playing field, connected the unconnected and flattened the world. This has opened up new markets for sourcing and selling, most notably in China and India.

This has led to what Friedman calls a "triple convergence": a critical mass of enabling technology, individuals, and organizations skilled enough to take advantage of these new platforms and the sudden arrival of more than three billion people from emerging economies onto this new, more level playing field. The world will never be the same again.6